How To Draft A Farm Lease.

In any financial arrangement clearly defined expectations can be critical. It is always wise to make sure that these agreements are formalized in some sort of written document, reviewed and signed by all parties involved. Many of us appreciate the hand shake deal, but when dealing with agreements involving real estate, written documentation reduces mis-understandings and protects all parties in the event of problems. Furthermore, the negotiation process helps develop communication between the parties and allows discussion of things that might not otherwise be considered.

Hat Are The Common Types Of Farm Lease Agreements?

Cash Rental

One of the most common types of farm leases are CASH RENTAL agreements. In other words, the tenant pays a flat rate per acre of land that they are farming. The tenant farmer assumes all of the risk, and reaps all of the rewards. The property owner typically is very hands off, and the rent does not fluctuate based on type of crop, or market values. These agreements are very straightforward. They should clearly define the following information:

Clearly defined description of the acres to be leased.
The amount to be paid in rent.
When payments are due.
The lease term, and renewal rights.
The names and signatures of all involved parties.

The benefits of this type of arrangement are that the rent amount is set and known to both parties and can be planned on. The down side is that the farmer tenant assumes all the risk of the volatile agricultural market.

Crop Shares

Another common agreement is a CROP SHARE agreement. This means that the rent is paid as a share of the crop sale. The structure of these can vary. It could be a fairly straightforward split, for example owner gets 25% tenant gets 75%. These amounts can be tied to yield, market price, or both. Typically the higher the yield the lower the market price and vice versa. Or it could be structured that the property owner is more involved and gets a higher percentage. For example, the property owner purchases the seeds and gets 33% of the amount of crop sales.

The benefit of this type of arrangement is that the property owner can be more involved in the farming, which allows for different tax report of the income. It also allows the tenant to share the risk. This arrangement might be appealing to a retired farmer who still wants to keep a hand in the business, or as a way for a new farm owner to gain experience working with a more seasoned farmer. The downside is that there is no guaranteed income to the property owner.

Key provisions:

Clearly defined descriptions of the acres to be farmed.
It may include specific crops to be planted.
The financial and other responsibilities of each party. Ex: who is responsible for purchasing seed, crop maintenance, etc.
The financial split of the value of crop sales.

Some Sort Of Combination Of The Two

In a hybrid agreement, the parties agree to a flat rate per acre and then a percentage of the crop sale above a certain amount. This provides the best of both worlds. There is a guaranteed rental amount, but it also allows the risk/reward of crop growth to be spread to all parties.

Key factors to consider

It is very important for both parties to consider and discuss the amount of risk they are willing to take.
In order to most accurately divide the risk between the parties, it is best to attach the rent to both the yield AND market price.
A clear determination of how to calculate the actual yield and price should be included. It may include factors like the time of crop sale, methods of measure, and other things.
Rent payment timelines should be negotiated and included.

Important Farm Lease Provisions

As discussed above, there are certain things that must be included. It is important that the key details are included in writing, however, legalese is not necessary. Clear, easy to understand, language should be used.

The following sections should absolutely be included:

The identities of the parties involved.
The exact property being leased.
Clear payment details.
Signatures.
Lease term and renewal.
One sentence on Choice of Law.

What happens if there is a disagreement, who is going to resolve any dispute?

There should be clearly defined consequences for not performing under the contract.

Other provisions to discuss and consider

Conservation Practices/Soil Fertility.
Crop insurance. Who purchases and who is covered by it?
Recipient of benefits obtained through government programs.
A provision allowing the property owner to have a UCC security interest in the tenant’s crops. KSA 84-9-334 also provides a state crop security interest.
Maintenance and access to farm data.
Ownership of Ag Data.
Right of entry onto the property by the owner.
Transfer of lease upon sale of the property.
Liability for environmental impact of the farming.
Including farm equipment into the lease.
Is this a rent to own?
Who is responsible for insuring the equipment?
Who is responsible for maintaining the equipment?
Inclusion and maintenance of irrigation equipment.

There are significant tax implications based on the type of lease agreement, so we recommend that you talk to your tax professional before finalizing any farm lease agreement.